Fiduciary Liability: 
Understanding the Risks and Responsibilities - The Fiduciary Duty of Public School Leadership

Public school board members, superintendents, and financial officers are entrusted with managing public funds, employee benefits, and investments in a way that prioritizes the best interests of students, employees, and taxpayers. This responsibility falls under the broad concept of fiduciary duty, a legal and ethical obligation that demands a high standard of care, prudence, and loyalty in decision-making.

Under state common law and various statutory provisions such as 42 U.S.C. § 1983 (civil action for deprivation of rights) and 29 U.S.C. § 1104(a) (ERISA fiduciary duties, though typically exempt for public entities), school administrators must exercise financial prudence to avoid liability. Additionally, state trust laws and governmental ethics codes often impose parallel fiduciary responsibilities to ensure transparency and protect public assets.

Key Fiduciary Responsibilities in Public School Administration
School district leaders must adhere to six primary fiduciary duties to mitigate liability:

1. Duty of Care – School officials must exercise the same level of diligence in managing school finances and benefits as a prudent individual would with their personal financial matters.
2. Duty of Loyalty – Decisions must be made in the best interests of the district, avoiding conflicts of interest or actions that benefit board members or administrators personally.
3. Duty of Obedience – School districts must comply with all federal, state, and local laws governing their operations, including financial management and employee benefits.
4. Duty of Confidentiality – Sensitive employee and financial information must be protected against unauthorized disclosure.
5. Duty of Prudence – Fiscal decisions must be based on well-researched, responsible financial strategies that minimize risks and ensure long-term sustainability.
6. Duty to Disclose – Board members and administrators must provide full transparency regarding financial matters and potential conflicts of interest.

The Johnson & Johnson Case: A Warning for Private & Public Employers

A recent lawsuit, Lewandowski v. Johnson & Johnson, Case No. 1:24-cv-00671 (D.N.J. 2024), illustrates the potential risks of failing to manage employee benefits prudently. The case alleges that the company mismanaged its prescription drug benefits, resulting in excessive costs for employees and the employer. One of the most alarming allegations in the complaint is that Johnson & Johnson, through its pharmacy benefit manager (PBM), agreed to wildly inflated drug prices for generic medications. The complaint cites specific instances where the company paid $10,239.69 for a 90-pill supply of the generic drug teriflunomide, a medication available for as low as $28.40 through online pharmacies. The suit further alleges that employees were financially burdened due to these overcharges through higher premiums, co-pays, and deductibles, while Johnson & Johnson’s PBM profited from these markups. Such practices, if proven, demonstrate a failure of fiduciary duty under ERISA, which requires fiduciaries to act prudently and in the best interests of plan participants.

Key takeaways from this case that apply to public school districts:

• Monitoring Third-Party Administrators – Schools must oversee benefit providers and ensure they are securing the best pricing. Developing a plan to do this is important.
  
• Transparency in Plan Costs – Understanding the true cost of benefits and questioning inflated prices is critical. Creating a path of education and monitoring in partnership with professional advisors is important.
  
• Regular Audits and Benchmarking – Schools should periodically review plan costs against industry benchmarks to ensure they are not overpaying. Avoiding “check the box” meetings for annual reviews is key to reducing liability exposure.

This case signals a broader legal trend: employees and watchdog groups are increasingly scrutinizing how employers manage benefits. While ERISA does not apply directly to public schools, state-level fiduciary duty claims could arise if districts are found to be mismanaging funds or exercising negligent supervision.

The Johnson & Johnson case is an example of the pharmacy plan that the employer had direct access and control over on behalf of its employees. In several states, school districts belong to state mandated self-insured pools for medical insurance. While school districts might not be able to audit these plans, the same concept applies to all lines of insurance and investments that school districts do have direct oversight with (ie: Dental, Vision, Life, Disability, Etc..).

Protecting Your District from Fiduciary Liability
To safeguard against legal and financial risks, public school leaders should implement best practices:

• Conduct Annual Fiduciary Training – Board members and senior administrators should receive regular training on their fiduciary responsibilities.
  
• Establish a Benefits Oversight Committee – A dedicated team should regularly review employee benefits, vendor contracts, and financial risks.
  
• Implement a Vendor Due Diligence Process – Ensure that third-party administrators, brokers, and investment managers are acting in the district’s best interests.
  
• Regularly Audit and Benchmark Benefits Plans – Compare plans with industry standards and other school districts to ensure competitiveness and cost efficiency.
  
• Maintain a Clear Conflict-of-Interest Policy – Require disclosure of any financial relationships between board members, administrators, and vendors.

To contact John M. Drye, Esq. with questions on this or related topics, please email Legal@campusbenefits.com.